Question 1

Suppose the required reserve ratio is 0 .15.Total bank deposits are $100 million and the bank holds $20 million in reserves.How much more money can the bank create if it does not hold excess reserves?

Accepted Answer

The bank can create additional money based on the excess reserves it holds. The excess reserves can be calculated as the actual reserves minus the required reserves. Required reserves = 0.15 * $100 million = $15 million. The bank has $20 million in reserves, so the excess reserves are $20 million - $15 million = $5 million. The money multiplier is 1 / reserve ratio = 1 / 0.15 = 6.67. Therefore, the bank can create additional money = excess reserves * money multiplier = $5 million * 6.67 = $33.35 million, which is approximately $33 million.

Question 2

If the required reserve ratio is 0.10, what is the maximum amount of money that can be created from a $2 million deposit in the banking system?

Accepted Answer

The maximum amount of money that can be created from a $2 million deposit, given a required reserve ratio of 0.10 (or 10%), is calculated using the money multiplier formula: 1 / reserve ratio. In this case, the multiplier is 1 / 0.10 = 10. Therefore, the maximum amount of money that can be created is $2 million * 10 = $20 million.

Question 3

Which institutions can create money?

Accepted Answer

The Fed has the authority to create new money by increasing the money supply through monetary policies such as reducing interest rates or purchasing government securities. However, this new money is not physically printed or minted. Instead, the Fed electronically credits the accounts of banks, which in turn can use these funds to create new loans and essentially create new money through the fractional reserve banking system. Therefore, banks can also create money to a smaller extent.

Question 4

If the required reserve ratio is 0.20, what is the maximum amount of money that can be created from a $5 million deposit in the banking system?

Accepted Answer

The answer of If the required reserve ratio is 0.20,...

Question 5

If the reserve ratio is 0.08, the money multiplier is:

Accepted Answer

The money multiplier is calculated as 1/reserve ratio. Therefore, the money multiplier in this case is 1/0.08 = 12.5. So the best choice is (D).

Question 6

The reason why the banking system can increase checkable deposits by a multiple of initial deposits is that:

Accepted Answer

When a borrower takes out a loan and spends the money, the recipient of that spending will likely deposit the money into their bank account, increasing the bank's reserves. This allows the bank to make additional loans and increase the money supply through a multiplier effect. This process continues as long as borrowers spend and deposit the money they borrow. Therefore, D is the best answer.

Question 7

If the reserve ratio is 0.1, the money multiplier will be:

Accepted Answer

The money multiplier is calculated as 1/reserve ratio. So in this case, the money multiplier would be 1/0.1 = 10. Therefore, choice B is the correct answer.

Question 8

Suppose the required reserve ratio is 0 .20.Total bank deposits are $200 million and the bank holds $50 million in reserves.How much more money could the bank create if it does not hold excess reserves?

Accepted Answer

The bank is required to hold 20% of its deposits as reserves, which amounts to $40 million ($200 million * 0.20). Since it currently holds $50 million in reserves, it has $10 million more than required. This extra $10 million can be used as the base for new loans. Given the reserve ratio of 0.20, the bank can create additional loans up to 5 times the excess reserves (since 1/0.20 = 5), resulting in $50 million ($10 million * 5) of additional money creation.

Question 9

When banks offer checking accounts, they are issuing a(n):

Accepted Answer

Checking accounts are a type of financial asset that functions as money because they are used as a means of payment and can be easily converted into cash or used to make purchases electronically.

Question 10

The amount of money ultimately created per dollar deposited when people hold no cash is found using the:

Accepted Answer

The amount of money ultimately created per dollar deposited when people hold no cash is found using the money multiplier, which is determined by the required reserve ratio. Therefore, the correct answer is D).

Question 11

When a $100 bill is printed by the Fed, the Fed has a financial liability because the:

Accepted Answer

When the Fed issues a $100 bill, it creates a liability on its balance sheet because the bill represents a claim on the Fed's assets.

Question 12

If people held all their money as cash:

Accepted Answer

When people hold all their money as cash, banks cannot create money through the process of making loans and accepting deposits, which is essential for the money creation process in a fractional reserve banking system.

Question 13

If the money multiplier is 5, what is the reserve ratio?

Accepted Answer

The reserve ratio is the reciprocal of the money multiplier. Therefore, if the money multiplier is 5, the reserve ratio is 1/5 = 0.20.

Question 14

As the reserve ratio goes up, less money will be created because:

Accepted Answer

As the reserve ratio goes up, banks are required to hold a higher percentage of deposits in reserve, meaning they have less money available to lend out. Therefore, banks will extend fewer loans, resulting in less money being created.

Question 15

When a bank makes a loan, the money supply:

Accepted Answer

When a bank makes a loan, the money supply increases as the borrower now has access to additional funds that were previously not in circulation. This is because banks are able to create money by making loans through a process called fractional reserve banking. As long as the loan is not immediately repaid or cancelled, the increase in the money supply remains in circulation.

Question 16

The higher the reserve ratio, the:

Accepted Answer

The reserve ratio is the fraction of deposits that banks are required to hold as reserves. A higher reserve ratio means that banks are required to hold more reserves, which leaves them with less money to lend out. As a result, the money multiplier decreases, meaning that a smaller amount of money is created through the lending process. Therefore, choice C is the correct answer.

Question 17

As the reserve ratio goes up, the money multiplier goes:

Accepted Answer

The reserve ratio is the fraction of deposits that banks must hold in reserve and not lend out. When the reserve ratio increases, banks can lend out less money, reducing the money supply and causing the money multiplier to decrease. Therefore, the best choice is B, down, and less money will be created.

Question 18

If the total deposits of the banking system are $400 billion, how much money could these reserves support if the required reserve ratio is 0.20 and banks hold no excess reserves?

Accepted Answer

The total deposits the banking system can support is calculated by dividing the total deposits by the required reserve ratio. If the total deposits are $400 billion and the required reserve ratio is 0.20 (or 20%), the calculation is $400 billion / 0.20 = $2,000 billion. This means the banking system can support deposits of $2,000 billion if banks hold no excess reserves.

Question 19

If the reserve ratio is 0.25, the money multiplier is:

Accepted Answer

The money multiplier is calculated as 1 divided by the reserve ratio. Therefore, with a reserve ratio of 0.25, the money multiplier is 1 / 0.25 = 4.0.

Question 20

The formula for the money multiplier is:

Accepted Answer

The formula for the money multiplier is 1/r where r is the reserve ratio. This is because the money multiplier shows the amount by which the money supply expands when banks make loans, and this expansion is limited by the reserve ratio.

Quiz 28: The Financial Sector and the Economy